Cetera Named in Small Plan Excessive Fee Suit

A participant in the Checksmart
Financial 401(k) Plan has filed a lawsuit contending fees for funds
offered in the plan are too excessive.

The lawsuit accuses
Checksmart; its plan committee, which only has one member; and the
plan’s investment adviser, Cetera Advisor Networks, of only offering
expensive and unsuitable actively managed mutual funds as investment
options in the plan without an adequate or appropriate number of
passively managed and less expensive mutual fund investment options.
According to the complaint, most investment options have expense ratios
of 88 to 111 bps, which the document says are four or more times greater
than retail passively-managed funds—which were not made available to
the plan and its participants during the class period. In addition, the
average expense of all funds is 104 bps.

Perhaps with
the defendant Cetera in mind, the complaint notes that the Employee
Retirement Income Security Act (ERISA) also imposes explicit
co-fiduciary liabilities on plan fiduciaries, providing a cause of
action against a fiduciary for knowingly participating in a breach by
another fiduciary and knowingly failing to cure any breach of duty. It
also asks that “to the extent that any of the defendants are not deemed a
fiduciary or co-fiduciary under ERISA, each such defendant should be
enjoined or otherwise subject to equitable relief as a non-fiduciary
from further participating in a breach of trust.”

The compliant points out
there are virtually no Vanguard index funds offered in the plan, and
mentions that retail shares of the Vanguard S&P 500 Index Fund have
an expense ratio of 16 basis points, while Admiral Shares (which
requires a minimum $10,000 investment—an amount the plan would easily
cover) has an expense ratio of 5 basis points.

The lawsuit
specifically calls out the plan’s ‘Lifestyle Portfolios’—risk-based
investment options that hold $13.25 million, or 52.63%, of the
approximately $25 million in plan assets—saying not only are they the
most expensive plan investments, but they materially underperformed the
S&P 500 total return under every benchmark.

“The plan has
paid grossly excessive fees during the pertinent period for extremely
underwhelming performance, and …defendants have engaged in significant
breaches of fiduciary duty by (a) failing to ensure that the plan paid
reasonable and appropriate fees, and (b) retaining these improper and
imprudent investment options,” the compliant says.